Kansas City Corporation holds three assets when it comes out of Chapter 11 bankruptcy:
Book Value Fair Value
Inventory . . . . . . . . . . . . . . . . . . . . . . $ 86,000 $ 50,000
Land and buildings . . . . . . . . . . . . . . . 250,000 400,000
Equipment . . . . . . . . . . . . . . . . . . . . . 123,000 110,000
The company has a reorganization value of $600,000.
a. Describe the rules to determine whether to apply fresh start accounting to Kansas City.
b. If fresh start accounting is appropriate, how will this company's assets be reported?
c. If a Goodwill account is recognized in re-organization, where should it be reported? What happens to this balance?